Sharpe Ratio in Excel with MarketXLS

The Sharpe Ratio is one of the most important metrics for evaluating a portfolio’s risk-adjusted performance. It measures how much excess return you receive for a certain level of risk. By using MarketXLS, you can seamlessly calculate the Sharpe Ratio for your portfolio directly in Excel, helping you compare your strategy’s performance to a risk-free benchmark over your chosen time frame.

Why Use This Function?

• Evaluate Risk-Adjusted Performance: Know if your portfolio’s returns justify the risks taken.
• Compare Multiple Portfolios: Easily compare different portfolios or strategies by focusing on risk-adjusted returns.
• Flexible Period Options: Adjust the calculation for different months (e.g., 3, 6, 12) to see how performance changes over varying durations.
• Assess the Impact of Risk-Free Rates: Quickly measure your returns above a specified risk-free rate (e.g., 0%, 2%, etc.).
• Useful for Different Investment Strategies: From short-term trades to long-term portfolios, the Sharpe Ratio suits various strategies, making it helpful in both tactical and strategic analysis.
• Quick Error Handling: The function returns clear messages or “NA” in case of invalid inputs or portfolio setups.

How to Use in Excel

Simply type the function into any cell in Excel, referencing your portfolio data and any optional parameters you prefer:

SharpeRatio(portfolio, [Period], [RiskFreeRate], [variation])

1. “portfolio” typically references a range or named range in Excel containing your portfolio composition or a reference from another function.
2. “Period” is the number of months used to calculate monthly returns (e.g., 12 for one year of monthly data).
3. “RiskFreeRate” is the annual risk-free rate, typically expressed as a decimal (e.g., 0.02 for 2%).
4. “variation” specifies the type of Sharpe Ratio you want:
   • ExAnte – Forward-looking approach.
   • ExPost – Historical approach.
   • (Blank) – Calculates a standard Sharpe Ratio without specifying ex-ante or ex-post.

MarketXLS handles the underlying details—calculating monthly returns, portfolio weighting, and risk-free return adjustments—so you can focus on interpreting your results.

Parameters Explained

Example Usage

Basic Examples

1. Standard Sharpe Ratio with Default Period and Zero Risk-Free Rate
   =SharpeRatio(A1:B10)
   In this example, Excel looks at the portfolio in A1:B10, calculates monthly returns over the default 12 months, and assumes a 0% risk-free rate.

2. Sharpe Ratio Over 6 Months with 2% Risk-Free Rate
   =SharpeRatio(A1:B10, 6, 0.02)
   This calculates the portfolio’s 6-month Sharpe Ratio while specifying a 2% annual risk-free rate.

3. Using an Ex-Post Sharpe Ratio
   =SharpeRatio(A1:B10, 12, 0.01, "ExPost")
   Calculates a historical (ex-post) Sharpe Ratio for a one-year period (12 months) and a 1% risk-free rate.

Advanced Scenarios

1. Comparing Multiple Variations
   • Standard (no variation): =SharpeRatio(A1:B10, 12, 0.02)
   • Ex-Ante: =SharpeRatio(A1:B10, 12, 0.02, "ExAnte")
   • Ex-Post: =SharpeRatio(A1:B10, 12, 0.02, "ExPost")
   Use these side by side to see if there’s a difference between forward-looking and historical Sharpe Ratios for your portfolio.

2. Multiple Portfolios
   • Portfolio A in one sheet and Portfolio B in another. Combine the function with references across sheets:
   =SharpeRatio(Sheet1!A1:B10, 12, 0.03)
   =SharpeRatio(Sheet2!A1:B10, 12, 0.03)
   Compare the returns of two separate portfolios under the same risk assumptions.

3. Pairing with Other Functions
   • Use the SharpeRatio with MarketXLS’s ValueAtRisk or SortinoRatio functions in adjacent cells for deeper risk analysis.
   • Track multiple risk metrics side by side and create custom dashboards in Excel.

Common Questions and Troubleshooting

• "Why am I getting 'NA'?"

• Your portfolio may not contain valid symbols, or the function encountered an error while retrieving data. Check the ticker symbols and weights to ensure correctness.

• "How do I handle a portfolio that doesn’t total 1?"

• MarketXLS auto-adjusts weights if the total is not 1. You can also manually adjust them to ensure correct distribution.

• "What if I leave out the Period?"

• The function defaults to 12 months, representing one year of monthly returns.

• "Does this function handle negative risk-free rates or unusual interest rate scenarios?"

• Yes, you can pass negative or very low values as decimals (e.g., -0.005), and the function will interpret them accordingly.

• "Can I use monthly returns over a multi-year period (e.g., 36 months)?"

• Absolutely. You can set Period to 36, and MarketXLS will calculate the monthly returns over those 36 months.

By incorporating SharpeRatio into your MarketXLS workflow, you’ll gain a deeper understanding of your portfolio’s performance under various market conditions—all in a straightforward and intuitive Excel environment. Leverage the power of this risk-adjusted metric to make better-informed investment decisions.